Core Gold AGM 3) - CEO Address B - Vertex OneThe second item in CEO Mark Bailey's address covered debt issued some years ago by Vertex One.
The debt is currently meant to have been transferred to Titan Minerals. It may not actually represent much problem for Core Gold, but its status is somewhat in limbo. Given a good resolution to come from the strategic process underway, the Vertex debt would likely be paid off in short order. Core Gold should have no difficulty in keeping it current and in good order, even moreso as Core is likely generating an overall profit now - TBD, to be seen in the Q3 results.
However, the debt transfer is of interest and concern to shareholders because it is Titan Minerals that is working to take on the debt, not some independent and unrelated financial company. Titan is bidding for Core right now and based on their materials, has apparently not signed a CA.
It is obvious that many shareholders feel that Titan has been aggressive in its methods, and continues to be. For example, the wording on the Circulars, those phone-books people are receiving now, appears demanding, and clearly pre-emptive of the strategic process. However, in terms of concern over Titan and the debt as a threat, even if they called the debt for payment, Mark Bailey informed that it would likely not be endangering to Core, vs. how it might be for an Australian company. That is significant reassurance.
Another reason the debt transfer is of concern is that it is intended that the exercise price of the convertible debt be changed from Cdn $0.30 to Cdn $0.18. It is unclear how fair the new conversion price is, as it was negotiated during the same period when Titan was arranging its takeover bid, and when the Core Gold stock price was anomalously low - Core’s price is well above those levels now. However, the debt was due, and a change in exercise price is not out of the question when debt is extended.
At the AGM, Mark Bailey advised that for its part, Core had approved the sale, transfer and restructuring of notes issued by Vertex, comprising a promissory note of US $1.5 million, and a convertible debenture of US $1.0 million.
Photo below - a shed houses the process stockpile, where ore is fed into a grizzly to filter out larger rock. Workers periodically clear the grizzly of stones lodged in its grate. The ore falls from the grizzly onto a conveyor in a tunnel, which distributes it to the ball mills for fine grinding.
Some further detail is provided here. The Vertex debt lies within two Vertex funds now managed by PenderFund Capital Management, the Vertex Managed Value Portfolio and Vertex Enhanced Income Fund.
The transfer of the Vertex One debt to Titan Minerals and change in its terms have been difficult for shareholders to understand, as there are a number of firms involved, numerous relevant dates, approvals required for transfer and multiple effects of the changes in terms.
CFO Sam Wong at the meeting explained that the debt ownership had technically transferred to Titan, but with as-yet unamended terms, pending TSX-V exchange approval.
Following the AGM question period, Jennifer Honeyman, Partner at Stikeman Elliott, Core’s counsel (one hopes the surname is correct - there are apparently 8 Jennifers at Stikeman), did her best to explain the situation, although it remained a bit opaque to listeners. She explained as well that Stikeman Elliott does not have the transfer agreement between Vertex One and/or PenderFund, and Titan Minerals.
Titan obtained the debt at a significant discount, US $1.89 million vs. the US $2.5 million face value, and acquired all accrued interest. The debt was apparently not put up to tender by Vertex or PenderFund.
In his address, Mark Bailey explained that TMX approval was required for the extensions and restructuring. That TMX approval was granted early September, but rescinded September 13 when the exchange’s regulator learned that the buyer was Titan Minerals:
“There were some terms required to do that, those were approved by the board and submitted to the TSX for approval. They gave tentative approval, but they withdrew that approval when it turned out Titan had bought those two debts. The approval is still pending” ... “we will update the public when we hear something that’s material to that debt”.
Some have pointed out that the sequence and dates of transfer have been found to be confusing or even misleading, and the TMX may have taken issue with that. The transaction and its outcome are in the exchange’s hands.
Photo - Core Gold's ball mills are the most iconic feature of its Portovelo plant. Nameplate capacity is 2,000 tons/day.
With regard to Titan's intentions, Titan obtained only that debt secured by Core Gold’s assets, not other debt bearing a high interest rate. Although the impetus to do that has been given positive spin in Titan’s circular, there is concern that Titan would wish to somehow use the debt improperly as a lever on Core Gold, although discussion at the AGM, principally led by Mark Bailey, allayed those fears a good deal.
Some concern has been registered, with regard to Titan’s bid for takeover of Core Gold’s assets, in that it was observed that there may be precedence or parallels in actions taken by some of the people and firms connected to Titan Minerals, as compared to the case of their roles with Galaxy Resources in Australia. Titan insiders are closely connected to Galaxy:
“Titan principals, shareholders and directors have an extensive track record in Australia and internationally, including experience with Galaxy Resources ...”
https://www.investi.com.au/api/announcements/ttm/ea4018b1-ca4.pdf
It has been instructive to note that Galaxy Resources obtained considerable or even controlling influence on Alita Resources, with the help of debt call forced by Tribeca, and the transfer of debt to Galaxy. Per Titan’s current circular seeking Core Gold, Tribeca is also principal player with respect to Titan Minerals and Core Gold.
“On August 16 [2019], Tribeca gave Alita a notice of default from the group of lenders for $27.02 million.”
https://www.metalbulletin.com/Article/3891116/Galaxy-Resources-buys-Alitas-debts-becomes-major-shareholder.html
At the AGM, Mark Bailey explained that Titan could not have the same influence over Core Gold, as Galaxy may have had over Alita, for example via Titan demanding on or manipulating the Vertex debt in Canada. Versus what Titan might do in Australia, he explained that the Canadian procedure is entirely different.
There is much greater protection in Canada for the borrower (Core Gold in this case), the amount of debt in question is much smaller, and any process pertaining to it would take a very long time - likely far beyond the time of Core’s strategic process. Calling the debt would not likely have positive consequences for any of the parties.
The interest of Core Gold shareholders is in how, with what timing, and with what means shareholder interest is being protected with regard to the transfer. And confusion remains, as Titans’ circular states that they had assumed the debt as of August 8, but Core Gold announced August 21 it was negotiating that debt with Vertex.
Some have spoken of Core Gold insiders meeting with Titan in Australia in mid-August. But by that time Titan had, by their own regard and according to their circular, already “assumed” the debt. Given the history with Titan, shareholders have every reason to be interested in how the Vertex transfer process went, and in what ways shareholders and the company were and are protected along the way.
It is widely doubted that Titan picked up the debt as a charitable enterprise - their claim to that effect in their circular has the appearance of absurdity. Overall, it seems unclear to shareholders what Titan, given the unfair nature of their first bid as determined by the courts, is up to. That said, Mark Bailey’s confidence and assurances cleared the air a good deal: Canada is not Australia.
With regard to the conversion price, it is true that if the Vertex/Pender/Titan debt purchase goes through, Titan would have access to cheap 18 cent shares for the US $1.0 million convertible. It remains to be seen what approval the TSX-V will grant in this and all other regards.
There is a clear intention to extend the “Vertex” debt, which is a plus for Core. Core Gold has been eliminating all its debts rapidly, and the impression gained, notwithstanding the hiccoughs in this transfer, is that the “Vertex” debts are in reasonable order so far as Core is concerned, and quite manageable with respect to Core’s operations. Short story - overall the Vertex debt situation may likely be OK.
For information - the various terms attaching to the Vertex debt are summarized in the chart below. The details are drawn from the AGM, Stikeman Elliott, and the Titan press release of September 16, and Core’s releases of August 21 and September 17. The matter is intricate, and again corrections are welcome.
Given that there is controversy surrounding the debt transfer and when each part of the transaction(s) happened, it may be worthwhile to have a list of key dates pertaining to it:
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• 1) June 22, 2015 - Vertex writes debt taken on by Core Gold, originally in the amount of US $4.0 million.
“... with investment funds managed by Vertex One Asset Management Inc. ("Vertex"), dated June 22, 2015 providing for an issuance of promissory notes (the "Notes") to Vertex for aggregate gross proceeds of US$4 million.”
https://www.coregoldinc.com/news-releases/2015/dynasty-closes-us-4-million-debt-financing-provides-operational-update/
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• 2) March 31, 2019 - Vertex One debt is payable on demand. Per a press release September 16 (see below, from Titan Minerals), “The Promissory Notes and the Convertible Notes are secured by a pledge of all of the issued and outstanding capital of Core Gold’s indirect wholly-owned subsidiary, Elipe S.A.“
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• 3) July 1 - the Vertex One funds containing the Core Gold debt, the “Vertex Managed Value Portfolio” and “Vertex Enhanced Income Fund”, are now managed by Pender Fund:
“On July 1, 2019, Pender was appointed as sub-advisor for the Vertex Value Fund, Vertex Enhanced Income Fund and Vertex Managed Value Portfolio.”
From Vertex’ December 31, 2018 financial statements, it appears that the notes are likely evenly distributed between the two Vertex funds, as each one carries US $1.25 million.
https://www.penderfund.com/news/penderfund-to-acquire-five-vertex-one-investment-funds/
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• 4) August 8 - Titan assumes all of the Vertex debt - per Titan Minerals September 30 takeover circular, page D-5 (PDF sheet 603),
“Acquisition of Core Gold’s secured debt; On August 8, 2019 Titan assumed all of the outstanding interest bearing secured debt with a total principal amount US $2.5 million from the holder for US $1.89 million.”
https://www.investi.com.au/api/announcements/ttm/1e3e2f55-e2e.pdf
Titan pursued only that portion of Core Gold’s debt that is secured by all of the assets of Elipe S.A., Core’s operating company.
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• 5) August 21 - Core Gold negotiates its debt with Vertex:
“Core Gold has entered into a debt extension agreement with each of Vertex Managed Value Portfolio and Vertex Enhanced Income Fund (collectively, “Vertex”) in order to extend the maturity date of an aggregate of US$2,500,000 principal amount of debt owing by the Company to Vertex and make certain other amendments.”
https://www.coregoldinc.com/news-releases/2019/core-gold-restructures-vertex-debt/
The relevant funds containing the Vertex One / Core Gold debt carry the Vertex name, but were in transfer to PenderFund. It is not clear whether Core Gold was negotiating with Vertex One or PenderFund. It is necessarily the case that Titan was part of negotiations, as per 4) above, Titan’s circular states that they had assumed all the debt August 8.
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• 6) August 26 - Penderfund entered agreement for transfer of the relevant Vertex One funds holding the Core debt. Announced August 27:
“Vertex One Asset Management, Inc. (“Vertex One”) and PenderFund Capital Management Ltd. (“Pender”) announced today that they have entered into an agreement (the “Agreement”) whereby Pender will acquire the investment fund management contracts for five investment funds ...”
https://www.penderfund.com/news/penderfund-to-acquire-five-vertex-one-investment-funds/
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• 7) September 11 - The TSX-V acknowledges Core Gold’s requests to reschedule and change the terms of the debts:
“The TSX Venture Exchange has accepted for filing a replacement to a non-brokered private placement announced Aug. 21, 2019.”
https://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aCGLD-2808750&symbol=CGLD®ion=C
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• 8) September 13 - The TSX-V rescinds its approval for the debt changes and transfer, having learned that the debt had already been transferred before application. For the US $1.0 million note, the rescindment affected the change in conversion price. For the US $1.5 million note, the transfer itself appears to have been the key item.
September 13 Titan Minerals had provided notice to Core Gold that the debts had been assigned to Titan as of August 21. This appears to conflict with 4) above, in which Titan’s Circular stated August 8 as the date of the assumption of the debt. The discrepancy is unresolved. The relevant data are per Core Gold’s announcement of September 17:
“The TSX-V initially approved the amendments to the Convertible Notes but rescinded its approval following notification received on September 13, 2019 that the Convertible Notes had previously been transferred. Titan Minerals provided to Core Gold on September 13, 2019 notice that the Vertex Debt had been assigned to Titan Minerals effective August 21, 2019. Accordingly, the Promissory Notes and Convertible Notes have not been amended as described above, and the Convertible Notes are not currently convertible into Core Gold common shares. While Titan Minerals has purchased both sets of notes, they have been purchased in their unamended form. “
https://www.coregoldinc.com/news-releases/2019/core-gold-comments-on-titan-minerals-announcement-of-its-intention-to-commence-a-take-over-offer-for-all-of-core-golds-common/
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• 9) September 16 - Titan announces it has acquired the Vertex debt:
“Titan has acquired all of Core Gold’s secured debt in the principal amount of US $2.5 million ...”
“The Promissory Notes and the Convertible Notes are secured by a pledge of all of the issued and outstanding capital of Core Gold’s indirect wholly-owned subsidiary, Elipe S.A., “
https://www.investi.com.au/api/announcements/ttm/ea4018b1-ca4.pdf